DK manufactures three products, W, X and Y. Each product uses the same materials and the same type of direct labour but in different quantities. The company currently uses a cost plus basis to determine the selling price of its products. This is based on full cost using an overhead absorption rate per direct labour hour. However, the managing director is concerned that the company may be losing sales because of its approach to setting prices. He thinks that a marginal costing approach may be more appropriate, particularly since the workforce is guaranteed a minimum weekly wage and has a three month notice period.

Required :

a) Given the managing directors concern about DKs approach to setting selling prices, discuss the advantages and disadvantages of marginal cost plus pricing AND total cost-plus pricing.

b) Calculate the full cost per unit of each product using DKs current method of

absorption

c) Calculate the full cost per unit of each product using activity-based costing and briefly comment on the contrast to your results in part (b).

The direct costs of the three products are shown below: Product Budgeted annual production (units) w 15,000 $ per unit 35 40 24,000 $ per unit 40 30 Y 20,000 $ per unit 45 50 Direct materials Direct labour ($10 per hour) In addition to the above direct costs, DK incurs annual indirect production costs of $1,044,000. An analysis of the company's indirect production costs shows the following: Material ordering costs Machine setup costs Machine running costs General facility costs $ 220,000 100,000 400,000 324,000 Cost driver Number of supplier orders Number of batches Number of machine hours Number of machine hours CONTINUED Page 4 of 7 The following additional data relate to each product: W Y Z 5 4 8 8 Product Machine hours per unit Batch size (units) Supplier orders per batch 1000 500 4 400 3 5